1. What are the basic earnings per share (BEPS) and diluted earnings per share (DEPS) for Timber Town Ltd for the year ended 31 December 2020?
2. Why might the increase in profit after tax differ from the increase in BEPS?
3. What is headline earnings per share (HEPS) and how does it differ from BEPS?
1. Basic Earnings Per Share (BEPS) for Timber Town Ltd for the year ended 31 December 2020 is R0.1026 per share, while Diluted Earnings Per Share (DEPS) is R0.1020 per share.
2. The increase in profit after tax may differ from the increase in BEPS due to factors such as changes in the number of shares outstanding or the issuance of convertible securities.
3. Headline Earnings Per Share (HEPS) is a measure that adjusts for exceptional items, providing a clearer picture of the company's core profitability compared to BEPS.
Calculating BEPS and DEPS
To calculate the Basic Earnings per Share (BEPS) for Timber Town Ltd for the year ended 31 December 2020, we need to divide the profit after tax by the weighted average number of ordinary shares outstanding during the year.
First, calculate the weighted average number of ordinary shares. At the start of the year, Timber Town had 3,000,000 ordinary shares, and on 1 October 2020, they issued an additional 1,000,000 ordinary shares. Therefore, the weighted average number of ordinary shares is [(3,000,000 x 12) + (1,000,000 x 3)] / 12, which equals 4,000,000 shares.
Next, divide the profit after tax of R410,400 by the weighted average number of ordinary shares (4,000,000) to obtain the BEPS. BEPS = R410,400 / 4,000,000 = R0.1026 per share.
To calculate the Diluted Earnings per Share (DEPS), consider the potential dilutive effect of the 12% convertible debentures. Each debenture is convertible into 125 ordinary shares, resulting in 18,750 additional shares due to the issue of R1,500,000 worth of debentures.
The diluted weighted average number of ordinary shares is 4,000,000 + 18,750 = 4,018,750 shares. Now divide the profit after tax by the diluted weighted average number of ordinary shares (4,018,750) to obtain the DEPS. DEPS = R410,400 / 4,018,750 = R0.1020 per share.
Understanding Profitability Metrics
The difference between the increase in profit after tax and BEPS can be attributed to various factors such as changes in the number of shares outstanding or the issuance of convertible securities. If the increase in BEPS is driven by improved profitability per share, then BEPS might be a better indicator of profitability. However, if the increase is due to other factors, profit after tax would provide a more accurate reflection of profitability.
Headline Earnings per Share (HEPS) adjusts for exceptional items, providing a clearer picture of the company's underlying profitability by excluding one-off gains or losses that are not part of the core business operations. It is calculated by dividing headline earnings by the weighted average number of ordinary shares outstanding during the year.
In conclusion, analyzing BEPS, DEPS, and HEPS together with other financial ratios is crucial to assess Timber Town Ltd's profitability over time and make informed investment decisions.